Fed unease sends shares to one-month low, emerging markets suffer

Marc Jones

5 Min Read

LONDON (Reuters) - World shares slid to their lowest level in more than a month and emerging markets fell for the fourth straight day on Tuesday, as concerns about an expected cut in U.S. stimulus and related gains in bond yields escalated.

Workers speak above an electronic information board at the London Stock Exchange in the City of London January 2, 2013. REUTERS/Paul Hackett

U.S. stock index futures, however, signaled a steadier tone ahead on Wall Street - after major indexes posted their longest losing streaks of the year on Tuesday - helping drag many markets off their lows. .N .DJI

Europe’s main stock markets .FTEU3 were down 0.8 percent by midday, near a two-week low, while emerging stocks .MSCIEF fell 1.3 percent to trade at a five-week low, though both indexes had recovered slightly during the morning session.

The selling has been the result of rising expectations that the U.S. Federal Reserve will start winding down its $85 billion-a-month support program next month. The prospect has driven up bond market borrowing costs, which in turn has sparked a move away from the riskier assets that have soared over the last few years thanks to the extra liquidity.

The pressure is unlikely to be alleviated ahead of Wednesday’s release of minutes from the most recent Fed meeting, which investors will be scouring for fresh hints on when the process may begin. <US/>

Ahead of their release, though, the relentless rise in U.S. government bonds yields, which sent benchmark 10-year debt to a two-year high of 2.9 percent on Monday, has slowed down slightly. The benchmark 10-year note yield had edged down to 2.88 percent ahead of the U.S. start.

As has been the recent pattern, German government bonds, Europe’s equivalent benchmark, moved in lock step with yields, easing to 1.87 percent after topping 1.9 percent a day earlier.

On European share markets, a 10.8 percent jump to 19.40 points in the Euro STOXX 50 Volatility Index .V2TX indicated uncertainty over the near-term outlook, though the measure remained below its 2013 peak of 26.80 points.

Ramin Nakisa, a global macro strategist for UBS in London, said market turbulence was bound to pick up further as the Fed starts to switch policy direction.

“We expect volatility... People will start to wonder whether there is anything in the fixed-income world that really is safe,” he said, adding that there was also likely to be another short selloff in share markets.

EMERGING WOES

The jitters about the future of U.S. stimulus have badly affected the emerging assets of Asia, where the fear is that an end to cheap money and an improvement in the performance of advanced economies will reverse a flow of much-needed capital.

Indonesia and India, which require the inflows to fund balance of payments shortfalls, saw their stock markets fall 4 and 1 percent, respectively, as their currencies continued to tumble.

Japan’s Nikkei .N225 slumped too, falling 2.7 percent, reflecting the exposure of many Japanese companies to India and Indonesia.

The rupee and Indonesia’s rupiah as well the Thai baht saw some relief in European trading but Callum Henderson, head of FX research for Standard Chartered, said things may only settle down once the Fed’s plans become clear.

“Our base case is that the Fed will announce the start of a modest and gradual tapering at its September meeting. By then it should be fully priced in, so it seems logical that we would see some degree of stabilization,” he said.

“If we also get a continued improvement in Chinese economic data then Asian currencies could find a more solid floor but for now having gained so much on the back of Fed QE from 2009 to 2012, some of that is being given back.”

COMMODITIES BATTERED

Despite the focus on the Fed cutting its stimulus, the dollar fell against a basket of major currencies .DXY, a move that left both the euro and sterling at one-month highs.

In commodities, copper slipped 0.2 percent to $7,293 per tonne, while gold steadied to $1,364 per ounce after snapping a three-day winning streak on Monday and moving away from a two-month high hit that session.

Brent crude prices fell 0.6 percent to $109.20 a barrel, pressured by the Fed speculation but supported by the loss of Libya’s oil exports as well as concerns that continuing unrest in Egypt could spread and interfere with supply.

Additional reporting by Subhadip Sircar and Neha Dasgupta in Mumbai; Editing by John Stonestreet